Regional risks follow rebound

British Foreign Secretary
William Hague
made a long overdue visit to Australia last week to bolster ­relations, but was frank enough to acknowledge that Britain was really looking beyond old commonwealth ties to the new centre of global growth in Asia. Apart from refreshing honesty, it was an unremarkable statement of diplomatic strategy except for the way it reinforced once again how Australia is now in the right place at the right time possibly for the first time in its modern history.

There was a time – when Britain turned its attention to enmeshing more with Europe – that some Australians felt they had been cut adrift in an uncertain world and worrying ­neighbourhood. Just how wrong that view has proved to be was underlined by a series of reports in The Australian ­Financial Review last week that highlighted how much of Asia – even putting China aside – is undergoing a stronger than anticipated rebound from the global financial crisis.

China’s extraordinary economic performance was reinforced by the annual figures, released last Thursday, that showed growth of 10.3 per cent last year, putting the North-East Asian country firmly back on its potential growth track after the 2008 downturn.

But the less recognised strong momentum across the region is highlighted by Indonesia’s growth, which is now broadly in line with the sort of figures seen in the late 1980s and early 1990s. The point was underpinned by ratings agency Moody’s, which last week lifted the country’s credit rating to just one notch below investment grade.

But there are similar positive trajectories around the region. South Korea’s exports have rebounded faster than most, ­reflecting the bitter restructuring lessons learned in the Asian financial crisis. Foreign investors have pumped about ­$120 billion into Asian sharemarkets in the past 18 months as they have chased better returns than those on offer in the United States and Europe. The Asian Development Bank estimates that non - Japan East Asia grew 8.8 per cent last year – compared with 5.2 per cent the year before, amid the ­global ­financial crisis – as stimulus spending, greater inter­regional trade and then a steady flow of capital from other parts of the world offset the global downturn.

The latest trade statistics show Australia’s growing exposure to Asia, given than 73 per cent of the nation’s exports are going to the region. So, by this measure, Australia is much more dependent on the region’s health than many other core Asian countries. Last year there was also a growing flow of capital from Asia and companies from smaller countries joined their Japanese and Chinese counterparts in investing in Australia.

So how Asian countries negotiate their way to more balanced and stable growth – forecast by the Asian Development Bank to be about 7.3 per cent this year – from last year’s sharp ­recovery is crucial to Australia’s outlook.

Here there are some looming risks that will test whether Asian policymakers can live up to their demands for a greater say in the way the world economy is run. Inflation has picked up as some countries have pursued a growth rebound and paid less heed to bubbles that may be emerging due to inflows of hot capital. Currencies should appreciate in many cases to help lessen this risk, and to contribute to the global need to reduced imbalances between current account surplus and deficit countries.

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It also remains to be seen how export-dependent countries will cope with continued weak growth in their major markets in Europe and the United States once the impact of stimulus measures is removed from their growth momentum. This will be the real test of how much these countries are decoupled from the big consumer markets that have supported their export-driven growth for decades.

Several countries have taken steps towards capital controls to prevent bubbles if the recent flow of hot money continues. These have so far been modest measures that should not impede long-term investment or trade, but they should not be allowed to become an alternative to the tougher need to rein in inflation with tighter monetary policy.

The final months of last year provided some evidence of reluctance to calmly address these issues as currency tensions erupted between some countries – notably Japan and Korea. Indonesia’s Bank Indonesia, for example, has been reluctant to raise interest rates despite a growing inflation risk evident in sharply rising food prices.

Much depends on China’s capacity to deal with its own ­structural bottlenecks and inflation problems without bringing about a significant slowdown, because so much of the rest of the region depends on Chinese demand for components and ­commodities. China has played a responsible role through the financial crisis by managing its economy in a way that has ­supported the region, but its neighbours will not thank Beijing if it continues to refuse to shoulder a proportionate share of the burden of currency adjustment. Given Australia’s increased export dependence on the region, the stakes are high for this nation on a successful resolution of these tensions.